Citation: 2013 TCC 168
Date: 20130529
Docket: 2011-940(IT)G
BETWEEN:
MYRDAN INVESTMENTS INC.,
appellant,
and
HER MAJESTY THE QUEEN,
respondent,
AND BETWEEN:
Docket: 2011-943(IT)G
DANIEL HALYK,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR ORDER
Hogan J.
I Introduction
[1]
The taxpayers in this
case, Myrdan Investments Inc. (“Myrdan”) and Daniel Halyk, were successful
in their appeals to this Court. In my judgment, I invited both parties to
provide me with representations on costs. Both parties filed written
submissions and I am now prepared to dispose of the matter of costs.
[2]
A number of issues in
dispute had been settled by Consent to
Judgment on the eve of the trial. Thus, the only issues that were litigated at
trial were whether a truck was an “automobile” for the purposes of the deduction
of capital cost allowance by Myrdan, and to what extent Mr. Halyk’s use of the
truck in question was personal. This Court found that Mr. Halyk made minimal
personal use of the truck and that there was a $950 shareholder benefit to him
in respect of that personal use.
[3]
The appellants request solicitor-client costs on a full indemnity
basis. Alternatively, they request party-and-party costs up to the date of
their September 28, 2011 settlement offer and costs on a solicitor-client
basis from that date, in addition to disbursements. The respondent concedes
that the appellants are entitled to costs in accordance with Tariff B of the
Rules. However, the respondent contests the appellants’ request for costs in
excess of the tariff amounts.
II Summary of Myrdan’s Costs, Result of
Judgment, and Tariff Cost Award
|
Total costs
(including audit and objection stage)
|
Costs
from Notice of Appeal to hearing
|
Costs
post-settlement offer
(up to and including the hearing)
|
Result at trial: net reduction in income
|
Taxes recovered as a result of trial (estimated)
|
Tariff Award
|
|
$48,076.75
|
$37,845.89
|
$33,106.59
|
$19,380
|
$4,845.00
|
$9,619.76
|
[4]
In Myrdan’s case, the legal costs subsequent to the
audit/objection stage exceeded the total amounts in issue. The amount in issue
on appeal does not present the entire picture, however. Much more was at stake
for Myrdan prior to the settlement by Consent to Judgment reached on October 12,
2012. It would therefore appear that many of Myrdan’s costs pertain to issues
that were settled with the Minister on the eve of the trial.
III Summary of Mr. Halyk’s Costs, Result of
Judgment, and Tariff Cost Award
|
Total costs
(including audit and objection stage)
|
Costs
from Notice of Appeal to hearing
|
Costs
post-settlement offer
(up to and including the hearing)
|
Result at trial: net reduction in income
|
Taxes recovered as a result of trial (estimated)
|
Tariff award
|
|
$11,914.47
|
$11,914.47
|
$4,363.19
|
$16,733
|
$6,525.87
|
$3,450.00
|
[5]
The amount at issue for Mr. Halyk on
appeal was $17,683 (not taking into account the $950 shareholder benefit that the
Tax Court found to have been received by him). Thus, the income inclusions he
was appealing clearly exceeded his costs in pursuing the appeal. However, his
estimated tax in issue only exceeds his costs incurred after the appellants’
settlement offer of September 28, 2011.
IV Issue
[6]
Can an award of costs above the
tariff amounts be based on the Minister’s conduct at the pre-litigation stage?
V Positions
of the Parties
(A) Appellants’ Position
[7]
The appellants argue that the
Minister issued reassessments without completing her audit. In particular, the
appellants take issue with the Minister’s failure to review the management
services agreement between Myrdan and Total Energy Services Ltd., since a
review of that document could have resolved many of the issues in dispute. The appellants filed
Notices of Objection and, since they did not hear from Appeals within the estimated
normal time frame for a review, they filed Notices of Appeal just over 12
months after the Notices of Objection were filed.
[8]
The appellants admit that the
amounts in issue were small, and that the issues were not of national
importance. However, the appellants argue that these factors, as well as the
large volume of work required to prepare for trying such simple issues, ought
to have motivated the Minister to settle. The appellants point out that a
significant portion of their costs was incurred in pursuing a settlement with
the Minister on the issues that formed part of the October 12, 2012 settlement.
The appellants argue that, because the settlement took the form of a Consent to
Judgment on the settled issues, I should consider, in disposing of this matter,
costs incurred in reaching that settlement.
(B)
Respondent’s Position
[9]
The respondent submits that the
appellants ought to have settled the issues that were not resolved by the
October 12, 2012 settlement. The respondent appears to rely on paragraph 147(3)(d) of the Rules for the
proposition that her attempts at settlement ought to mitigate an adverse award
of costs, since her two attempts at settlement were successful, except with
respect to the litigated issue as to the use of the truck. However, the
appellants’ (mostly) successful participation in the settlement negotiation
process ought also to be commended, so the respondent is in no better position
to claim that her settlement efforts weigh in her favour in fixing costs than are
the appellants to make a similar claim with regard to their own such efforts.
[10]
The respondent points out that the
appellants have admitted that the issues before the Court were not complex or
of national importance and that the quantum in issue was small. The respondent
submits that the amount of time required to prepare for trial ought to have
been minimal since there were few pertinent documents and only one witness, and
the trial lasted less than one day.
[11]
The respondent’s arguments on
settlement, quantum and complexity also cut both ways: one can equally as well argue
that the respondent ought to have been more flexible and settled the remaining
issues instead of forcing the appellants to trial, where the appellants
prevailed (with the minor exception of the $950 shareholder benefit found
by this Court). The respondent’s position also fails to take into account the
time required to prepare for the trial of the issues that were settled by
Consent to Judgment on the eve of the trial.
[12]
The respondent further argues that
it was “entirely reasonable” to test the evidence regarding the truck at trial
since the respondent considered that Mr. Halyk’s mileage record was
inadequate and that his mileage summary was based on hearsay. Since the
respondent would not accept Mr. Halyk’s records, it was also reasonable for Mr.
Halyk to decide to testify in Court, under oath, as to the use of the truck.
[13]
The respondent also contends that
the Minister’s conduct prior to the commencement of proceedings should not be
taken into account in determining the award of costs since there are no
exceptional circumstances here that would justify an increased award on that
basis. The respondent maintains that the conduct complained of by the
appellants (namely, failure to review a management services agreement and
advertising invoices, and failure to respond to letters from the appellants’
accountant) had no effect on the issue regarding use of the truck. An award of
solicitor-client costs on the basis of conduct requires that the conduct be
reprehensible, scandalous or outrageous.
The respondent argues that the Minister’s conduct did not reach that threshold.
In fact, the respondent maintains, in footnote 6 to the Respondent’s
Submissions on Costs, that “the actions complained of by the appellants do not
constitute improper conduct by the Minister.”
[14]
With respect, the failure to
inspect documents made available to the auditor and the failure to respond to
offers to provide information required for the audit can hardly be called
proper conduct on the part of the Minister. The Minister’s conduct might not
meet the “reprehensible, scandalous or outrageous” threshold, but it did impede
the dispute resolution process and this led to a late partial settlement on the
eve of the hearing.
VI Analysis
[15]
The appellants rely on the decision
of Judge Bowman (as he then was) in Merchant v. Canada for the proposition that,
although it is a general rule that conduct prior to the commencement of an
action is not relevant to an award of costs, that rule is not invariable. In Merchant,
it was the taxpayer who engaged in obstructionist behaviour that made an
orderly audit process all but impossible. The Court was forced to act as
auditor and to review documents that should have been provided to the CRA in
the audit phase. The Crown was awarded solicitor-client costs for the trial
process and for all pre-trial motions.
[16]
The appellants also rely on Hunter
v. Canada,
a case in which the Minister did not contact the appellants prior to issuing
reassessments and refused to acknowledge the relevance of Stewart v. Canada to the taxpayers’ business
losses from their farm operation. No determination was made in the award of
costs in Hunter as to whether pre-litigation conduct should be taken
into account in the awarding of costs, since the obstructionist behaviour of
the Minister continued well into the appeal process. However, two cases
referred to
in that decision suggest that conduct prior to the commencement of proceedings
may justify fixing a lump sum amount of costs beyond the tariff amounts.
[17]
In the present case, the Minister
was the party who impeded the CRA’s own audit process by refusing to accept or
review relevant documents. The respondent has pointed out that these documents
could have been reviewed by an appeals officer had the appellants waited to
file their Notices of Appeal with the Tax Court. However, the appellants waited
beyond the 12-month period within which an appeals officer could be expected to
be assigned to the case. With respect, it is not reasonable to blame the
appellants for advancing the dispute resolution process by filing Notices of
Appeal.
[18]
The respondent relies on The
Queen v. Landry
for the proposition that conduct of the parties prior to court proceedings
should only be taken into account in awards of costs in exceptional
circumstances. In Landry, the Federal Court of Appeal overturned a lump-sum
award of costs granted by me and ordered that each party bear its own costs of the
Tax Court proceedings. In that case, the Federal Court of Appeal concluded that,
significantly, the taxpayer (to whom the lump-sum award of costs had been
granted) and her lawyer did not cooperate with the Minister during the audit
and the time preceding the hearing. Information favourable to the taxpayer was
withheld by the taxpayer’s counsel until late in the appeal stage.
[19]
The present case is
distinguishable from Landry. Mr. Halyk went to some effort and expense
to have documents relevant to these appeals made available to the CRA auditor.
Those documents were not reviewed by the auditor, though she was aware of their
existence. Further, the auditor did not respond to requests for guidance on
what additional documents would assist in the audit process, but instead went
ahead with reassessments that were not founded on documents made available by
the appellants.
[20]
The respondent argues that this
conduct by the CRA had no impact on the determination of the issue tried before
this Court, namely, the use of the truck. However, in her written Submissions
on Costs, the respondent asserts that Mr. Halyk’s mileage log was
inadequate. The respondent’s position is that the Minister could not rely on
the mileage log or the mileage summary, the latter being based on Mr. Halyk’s
Outlook calendar and on information from third parties whom the respondent did
not have the opportunity to examine. This suggests that there was additional
information in the appellants’ possession that could have assisted the CRA
auditor in making a determination regarding the use of the truck. The CRA
auditor’s failure to request such information, or even to respond to the
appellants’ accountant when asked what additional documents could assist in the
audit, indicates that the conduct of the CRA auditor did have an impact on the
issue litigated before this Court.
VII Conclusions
[21]
I conclude that the respondent’s conduct
prior to the appeal stage falls short of the “reprehensible, scandalous or
outrageous”
standard required for an award of solicitor-client costs. I do find, however,
that the dispute resolution process was undermined through considered inaction.
The CRA auditor’s responses to questioning by counsel for the appellants
demonstrate that she made thoughtful decisions not to act and did so on the
basis of instructions from, and prior positions taken by, her team leader.
Whether the blame lies with the CRA auditor or her team leader is irrelevant.
Effective dispute resolution requires effort on the part of all adverse
parties. In this case, it is clear that the appellants went to some lengths to
cooperate with the CRA auditor and facilitate the audit process. The Minister’s
subsequent offers to settle notwithstanding, it is clear that some or all of
the issues before this Court could have been resolved at the outset if the
auditor had reviewed the appellants’ documentation, and pointed out gaps in
their records, prior to the appeal stage.
[22]
Merchant is authority for the proposition that conduct prior
to the commencement of an appeal may be taken into account in fixing an award
of costs. Landry is distinguishable on the basis that the current case
is one in which the appellant has been nothing but forthcoming and cooperative
in attempting to facilitate the dispute resolution process. It is the Minister
alone who has undermined that process by failing to review documents or
communicate effectively with the appellants, which resulted in a lengthy
dispute that might have been resolved well before it reached this Court. Thus,
it is appropriate in this case to award a lump sum amount of costs against the
respondent. For these reasons, I award the appellants costs of $20,000 plus
disbursements.
Signed at Ottawa, Canada, this 29th day of May 2013.
“Robert J. Hogan”
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